Production

Say defined political economy as the study of the formation, distribution and consumption of wealth. Production is at the beginning of the sequence and thus constitutes the source and the engine of economic development.

What is production?

Say introduced a new definition of production:^[16] it is not a creation of matter, but of utility, and Destutt de Tracy (1815, 310) embraced Say’s view, which played a crucial role in his analyses. Utility is the ability to satisfy human needs. It is not measured in physical units, but in utility degrees (Say 1803, 78). Production is “an extended exchange in which producers... offer productive services... and where they, in return, receive products, that is, any quantity of produced utility” (Say 1828-29, 120). The Physiocrats maintained that craftsmen are unproduc­tive because they do not produce any surplus, the value of their products being equal to that of their consumption. Say disagreed: craftsmen produce at least the interest of the capital used. For Smith (1776, 330), the labour not embodied in some material objects does not produce any value and is unproductive. For Say, instead, this labour renders useful services and produces an “immaterial product”, and Destutt de Tracy (1815, 162) argued that any labour that produces utility is productive labour.

Say admitted, however, that the labour producing immaterial products could not be accumulated and could not increase the national capital. Charles Dunoyer (1827, 68) accused him of being inconsequent: the fact that a product is immate­rial does not imply that it could not be accumulated, as the example of knowledge clearly shows, and in this perspective asserted that the state is the main producer in the economy (Faccarello 2010).

This is not to state that, for Say, knowledge is not important. He did not think that the division of labour could alone explain the progress of wealth: well-being improved because men learned how to better exploit natural resources and, in this perspective, sciences are the basis of industry and wealth. But there was more. It is necessary to know how to make the most of its discoveries in order to satisfy human needs: this task is performed by industry. Invention and innovation lie at the heart of the development process, of which scientists and entrepreneurs are the deciding agents.

Say divides the production process into three operations or functions: theory, application and execution. The entrepreneur, defined as the agent who “takes steps to create on his own account any product for his own profit and at his own risk”, is in charge of the second operation (Say 1803, 116).

The entrepreneur... is the principal agent of production. The other opera­tions are indispensable for creating products; but it is the entrepreneur who carry them out, who gives them a useful impulse, who produces values. He is the one who assesses the needs and especially the means to fulfil them, and who compares the goal with these means.

(Say 1828-29, 101)

The entrepreneur thus appears as the organiser of production, the intermediary between all the owners of productive services on the one hand and between all of them and the final consumers on the other (Say 1803-41, 735). In a nutshell, by performing a distinct economic function, the entrepreneur plays a pivotal role in the economy (Koolman 1971).

Say’s analysis of entrepreneurship followed a long tradition. The term “entre­preneur” was used in the Dictionnaire universel du commerce by Jacques Savary (1726, II, 630) to describe a person who creates an establishment where some indi­viduals are hired to work under his direction. Cantillon took up the idea: entre­preneurs organise production and the circulation of goods. As final prices are uncertain, so are their incomes.

We can affirm that, except the Prince and the landowners, all the inhabit­ants of a State are dependent; they can be divided into two classes, namely entrepreneurs and hired workers... entrepreneurs are subject to uncertain incomes, while all other classes receive certain incomes.

Though Turgot also mentioned the idea that the income of the entrepreneur was uncertain, he focused on another issue: the role played by the advances required for all types of productions in farming, industry, or commerce. His central figure is the capitalist entrepreneur who advances capital, hires workers, and organises pro­duction and sales. Turgot stressed that if entrepreneurs do not have enough funds, “they can easily decide to give up a part of their profits... to those who own capital” (Turgot 1766, II, 576). As he admitted that the interest of the loan does not depend on the profit on capital that the borrower expected to make, he thus clearly distinguished the interest on capital from the profit of the entrepreneur. “Apart from the interest on capital, the entrepreneur shall gain... a profit that rewards his skills, his work, his talents, the risk, and allows him to cover the yearly deprecia­tion of his advances” (Turgot 1766, II, 591).

Turgot’s reasoning involved an entrepreneur capitalist. Say, on the other hand, separated the two functions. The entrepreneur generally owns a portion of capital, but, most of all, he is the manager: he designs the product, identifies potential clients and buys productive services. All of this requires lots of knowledge. The entrepreneur is not a scientist properly speaking, but his role is to use science that can help satisfy human needs. “The job of an entrepreneur requires the ability to invent, that is... the ability to put forward the best ideas and the best way to uti­lise them” (Say 1828-29, 723). Put simply, Say envisioned the entrepreneur as an innovator.

Say’s Law

The importance of production in Say’s system is captured through his law of outlets (“loi des debouches”), known as Say’s Law, which has generated numer­ous controversies and misinterpretations.

In the chapter on outlets of the first edition, 1803-41, of Traite (Book I, Chapter XXII), Say seeks to refute the so-called “mercantilist” monetary fallacies. He criti­cises the views of economists such as Franςois Veron de Forbonnais (1754) and James Steuart (1767) who claimed that international trade spurs economic devel­opment by opening up new markets, and by increasing the quantity of specie in circulation within a country. Say contends that the abundance of money does not affect trade. He then concludes that it is pointless to favour a trade surplus in order to enhance the stock of gold and silver: “it is not the abundance of money but the abundance of other products in general that facilitates sales” (1803-41, 244). He aims to show that, in general the production of goods rather than the supply of money stimulates the demand for goods (Baumol 1977, 154). But, in the first edi­tion of Traite, Say’s discussion of the law is not limited to the chapter on outlets. In Book IV, Chapter V (1803, 688), he states that

contrary to what many people thought, the scope of the total demand for means of production, does not depend upon the scope of consumption. Consumption is not a cause: it is an effect. One must buy in order to con­sume; yet one can buy only what has been produced. Is the quantity of prod­ucts demanded therefore determined by the quantity of products created? Undoubtedly so....

and therefore general overproduction could not occur. Say would later be less categorical.

In the second edition of Traite, 1814, Say argues that “a product is no sooner created than it opens, from that instant, an outlet for other products to the full extent of its own value” (1814, 250). The passage does not mean that supply created its own demand, but simply means that the sale of goods increases one’s holdings of money, which potentially, but not necessarily, allows the purchase of other goods with the proceeds of the sale. In Lettres a M. Malthus, Say (1820, 4-5) adds: “as each of us can only purchase the products of others with his own products; as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase”. Say was aware that, at times, producers would not be able to sell all their merchandise. Thus, if some products do not sell, it is because “many people bought less because they earned less” (Say 1814, 253). Demand was constrained by successful sales (Beraud and Numa 2018a, 2018b). Thus the failure to produce (or the failure of factor owners to sell their services) must have reper­cussions on the demand for output, because the demand for product is financed out of earned income. In other words, a general demand shortfall is possible and can cause economic crises.

In Say’s terminology, a product is not only something that met human needs; it is something whose utility was worth what it costs. An unsold good or a good whose market price is less than its production cost does not constitute a product. One could be led to believe that in his letters to Malthus Say sought to reformulate his definition of a product to respond to his critics. This argument is incorrect for two reasons. His definition of production (Say 1814, 1139) as creation of utility - utility being conceived of as a measure of exchangeable value - implies that an unsold good is not a product and that if its current price is less than its production cost, the good should be valued at its current price.

It is no wonder, then, that Say (1819, 260) acknowledges that in a stagnating or declining economy, “all the demands are on the decline; the value of the products is not equal to the costs of production”. In other words, “while the demands are on the decline, there are always more goods [that are] supplied than goods [that are] sold” (Say 1814, 260n). Say argues that

a buyer manifests himself in an effective manner only when there is money to buy; and he can obtain money only through the products that he created or those that were created for him; it then follows that it is production that stimulates outlets.

(Say 1826, 1105)

In Lettres a M. Malthus, Say refutes Ricardo’s claim that “there is always as much industry as capital employed, and that all saved capital is always employed” (1820, 101 n1). In light of the 1813 recession in France, Say contends that many savings

were not invested, not all capital was employed, and many workers were jobless. In other words, for Say the economy is not always operating up to its full capacity, thereby admitting that a general glut is possible.

The production of a commodity does not necessarily create a demand because the good could remain unsold or could be sold at a price that is less than its produc­tion cost (Say 1828-29, 356-7). Once a product is sold, a potential demand is cre­ated so that the individual who sold it could use the proceeds of the sale to demand other products or financial assets. The individual could also keep all or part of the money proceeds to be spent at a later stage. If some products were oversupplied, they would be sold for less than their production cost. The purchasing power of the producer would be reduced, and this loss would eventually affect his expenditure. Therefore, demand deficiency could cause crises and money is not only a medium of exchange (Beraud and Numa 2018b).

Say thus paid close attention to the secular record and economic events of his time, which involved general gluts and the hoarding of cash. In other words, he thought of his law as a long-term principle. This transpires in the final paragraph of Cours in which Say defended the validity of his law described as a powerful engine of long-term industrial growth:

the theory of outlets, by showing that the interests of men and nations are not in opposition to one another, will undoubtedly propagate seeds of concord and peace, which will germinate with time and which will not be one of the smallest benefits of the more correct opinion that people will form about the economy of societies.

(Say 1828-29, 1273)

The law of outlets is an illustration of Say’s “practical political economy” (Say 1814, 12 n2; Numa 2019). He first lay out a general rule or a “law”, then he men­tions some qualifications after analysing how the rule applies to the reality of economic life, considering its effects both in the private and public spheres. Like Malthus, he reproached Ricardo of applying principles in a rigid and unqualified fashion. Applying principles abruptly without confronting them with experience leads to vague and inconclusive results (Say 1828-29, 762).

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